G7NESIS Newsletter #18

Just as the leaves fall in autumn, this also seems to apply to the key interest rates of developed countries except for Japan. These interest rate decisions do not appear to be easy: The central banks seem to be in a quandary ("between a hard place and a rock"). Developments on the bond market, the labour market and the decline in private savings and consumption point to a recession. This justified the Fed's 0.5% cut, which was more severe than most forecasts had expected. On the other hand, a continued strong stock market and US government support for various sectors support a "soft landing" scenario.

At the moment there is a tug-of-war between a growth-orientated economy, which is supported by the equity market, and an economic correction, which in turn is indicated by the bond market:

Stock vs. bond markets

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?This could continue until the final results of the US elections or the inauguration of the new US president in January 2025. It also remains to be seen whether and to what extent new US economic and fiscal policy orientations could subsequently change the global economy.

The G7NESIS assessments on this topic are explained further in this newsletter in relation to the US elections.?

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Market performance (as of 22 October 2024)

G7NESIS Managed Portfolios (as of 22 October 2024, in EUR)

US Elections

The closer the US elections get, the tighter the result seems to become. New poll results come out every day and are interpreted accordingly. Some investors are unsettled by these reports and the market may go through some fluctuations; but overall, the quarterly reported corporate profits and the corresponding buy and sell decisions of large institutional investors are still decisive at the moment.??

Regardless of who wins, the primary questions of investors are what medium to long-term impact the result will have on economic development and therefore also on the future course of the stock market. But it is also important from which starting point the new president is acting.

The overall economic situation in the USA is currently rated as good. Solid corporate profits, which have been generated primarily through private consumption, innovation and government subsidies.

1.?Innovation continues to be encouraged by the open economic climate in the US. Neither party will want to make any major changes to this. Only the export restrictions on key innovations could be implemented in small steps; for example, export restrictions on semiconductors to certain countries. But this is also supported by both parties, as are the trade restrictions to and from China. However, as soon as there are major trade interventions with which the US industry would no longer agree, it would be difficult to enforce them at government level.?

2.?Private consumption is declining as savings (especially those from the coronavirus period) are slowly being depleted and defaults on credit card payments are increasing. This could become a problem. On the other hand, inflation has fallen and interest rates have been lowered, i.e. consumption is becoming more affordable again.

3.?How the government subsidy programs will be continued is more of a question mark over the outcome of the election. This is because these programs are linked to a significant increase in the government deficit/debt (see chart on the next page). Unfortunately, it does not look like either party will be able to get this under control according to their election programs.

The Democrats would try to generate higher revenues by increasing taxes. At the same time, they are struggling with the cancellation of state subsidies and social benefits. This continues to put pressure on the expenditure side. The Republicans would probably cut state benefits. At the same time, however, they want to lower taxes, which reduces the revenue side.

In addition, the US President is always dependent on the balance of power in both houses (Congress and Senate) to push through changes in fiscal policy.

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US National Debt

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?What conclusions can be drawn from this?

1.?In terms of economic policy, the USA is in a comparatively better position with its companies, innovative strength and domestic demand than, for example, Europe (innovation slump) or China (weak domestic demand). The labour market shows fluctuations, but these are cyclical in nature. Economic weaknesses can be supported by the Fed's monetary policy. In terms of labour, the USA is not doing too badly either: AI affinity and a higher birth rate than the Eurozone, for example, can offer some protection.

2.?The risk lies in the reorientation of government subsidy and fiscal policy and the resulting increase or reduction in government debt. However, as long as this debt is still supported by strong demand for Treasuries from domestic (largest investor group: insurance companies) and foreign creditors (Japan as one of the main buyers), it is STILL financeable. As the global reserve currency, the USD plays a decisive role here. There are repeated attempts to replace this role with alternatives. However, as long as the US offers a free and secure economic area for companies without too many government regulations, this will remain difficult to realise.

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In terms of investments?

There may still be minor fluctuations and uncertainties until the election. However, markets that are influenced by political rumours or events generally have "short legs".? The expectation of a year-end rally therefore remains predominantly unchanged.

Newly elected presidents (although neither Harris nor Trump could actually be described as newcomers) usually have a "honeymoon period". That is, the economy and markets give them some time to "positively impress" them and continue to point upwards.?

G7NESIS House View

The G7NESIS investment committee remains positioned in the "center" with a neutral equity allocation, a medium duration in the bond segment and a conservative investment rating. This also allows for a faster reaction to extreme developments. Equity research and analysis result in a balanced positioning of growth and value companies. The current higher valuation of the US and Switzerland is predominantly due to economic risks. By comparison, the Eurozone, which has structural problems to solve in addition to the economic risks, is in a worse position: restrictive economic policy, reform backlog, etc.

G7NESIS has taken positions in the hedge fund sector and built up its strategic and tactical gold positions, where the price increase will continue to be capitalised on.?

?There have been no changes to the duration strategy or the regional context.

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The G7NESIS team is looking forward to a personal dialogue with you and hopes that you find this newsletter an enjoyable and informative read.

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This information is for information purposes only and does not constitute investment advice or an offer. The information contained in this document has been compiled by the publishers with the utmost care. The information and opinions originate from reliable sources (including Bloomberg) and the reference currency is always used. Despite their professional approach, the publishers cannot guarantee the accuracy, completeness or timeliness of the information. The publishers therefore expressly disclaim any liability for investments based on this document. The gross yield shown is not an indicator or guarantee of future performance.

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